June 4, 2007
I am supplementing, clarifying and amending my comment letter of April 5, 2007 in reply to a point made in the May 29, 2007 letter from Patricia Gilniecki of the NASD (the "NASD May 29, 2007 letter") responding to comments concerning the time period for NASD By-Law change voting.
As background, NASD is a Delaware non-stock corporation. Section 4 of the Restated Certificate of Incorporation of National Association of Securities Dealers, Inc. states "the members shall be entitled to vote ... on any amendment to the ByLaws of NASD in accordance with the procedures for such a vote as provided in the ByLaws."
Article XVI of the NASD ByLaws is entitled "Procedure for Adopting Amendments to By-Laws." The title and the six sentences of Article XVI consist of more than 175 words. The title of Article XVI sets forth the purpose of this article: to provide the procedure for adopting amendments to the NASD's ByLaws.
The first sentence of Article XVI defines certain individuals who may propose amendments to the ByLaws. The second sentence of Article XVI sets forth another method for proposing amendments to the ByLaws. Limits exist as to the individuals and parties allowed to propose amendments to the NASD ByLaws. As the NASD noted in connection with Article XVI reflected in SEC Release No. 34-38545 SR-NASD-97-28 dated April 24, 1997 with respect to previous amending of the ByLaws "the Association proposes to delete authority for the district committees to propose changes to the NASD By-Laws." The third sentence of Article XVI states that a written record will be kept of proposed amendments. The fourth sentence of Article XVI indicates the board may adopt amendments to the ByLaws. The fifth sentence of Article XVI notes that if an amendment is adopted by the board, and is other than a spelling or numbering correction or as otherwise provided in the ByLaws, then a copy of the adopted amendment shall be sent to each member. The sixth sentence provides that if an amendment is approved by a majority of the membership voting within 30 days of submission of the amendment to the membership and then approved by the SEC, it takes effect.
On page 7 of the NASD May 29, 2007 letter, Ms. Gilniecki concedes that "Article XVI of the NASD By-Laws provides a procedure for obtaining member approval of amendments to the ByLaws." This is a proper admission because, as noted above, the title of Article XVI is "Procedure for Adopting Amendments to By-Laws." However, Ms. Gilniecki then promptly disregards the title of Article XVI as she goes on to state that the Article XVI procedure does not expressly purport to be the only means for member approval of amendments to the NASD By-Laws. She ignores the fact that the title of Article XVI does not read "A Procedure for Adopting Amendments to By-Laws." She correctly indicates that "Article XXI of the NASD ByLaws permits special meetings of the membership." Unfortunately, she then tries to link up these ideas and makes the hollow point that "the Article XVI ByLaw procedure did not eliminate the ability of NASD members under Article XXI (the special meeting provision) ... to approve changes to the ByLaws."
The NASD's argument misses the mark. It is absolutely correct that Article XVI does not eliminate the ability of NASD members to approve changes to ByLaws at a special meeting (called pursuant to Article XXI). However, a special meeting under Article XXI that is aimed at amending the NASD's ByLaws still needs to comply with the protocol established by Article XVI. For example, if a special meeting of members were called per Article XXI in connection with a proposal to amendment the NASD's ByLaws but the actual amendments were simply talked about but were not distributed to the members (in violation of the fifth sentence of Article XVI), any ill-informed member vote on the amendments would be void. Similarly, a special meeting called pursuant to Article XXI in connection with a proposal to amend the NASD's ByLaws with the vote held more than 30 days after the submission of the amendments to the members or requiring a 2/3 vote (in violation of the sixth sentence of Article XVI) is also void.
Why was the vote not held within 30 days from the point in time the amendments were submitted to the membership in order to steer clear of any conflict with Article XVI? This is unknown. This question is not addressed in the NASD's Proxy Statement fro last year, it was not addressed in the NASD May 29, 2007 letter and the NASD's motion to dismiss the Standard Investment Chartered case was granted this year before this question could be answered by NASD personnel in discovery.